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The science of executive pay and perks

9 May 2012 08:54 am - 0     - {{hitsCtrl.values.hits}}

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By Dinesh Weerakkody
Many executives Recently, I was asked to speak to a group of senior executives on how the executive pay and perks should and must be structured.at this forum wanted to know how to put together a compensation philosophy, fix salaries for new employees, design a pay mix, and structure short or long-term incentive plans, and also the use of restricted stocks, scrip bonuses and options to retain key employees. To begin, starting salaries are usually the lowest amount employers will pay for work. Companies expect new hires to know less about a new position, so they typically start them lower than someone with an established track record.

Employers generally ensure that entry-level starting salaries match the hiring market requirement and that new employees as far as possible will be put at a lower salary point than their veteran job peers. Median salaries are the amount in the center between the lowest and the highest paid compensation. Average salaries are the product of the sum total of all the salaries, divided by the number of observations. Median salaries are better measures of ‘normal’ pay, being central values. Averages can swing wildly with the addition of extremely high or low values to the group. No matter how high the high, or how low the low, the median is still the middle. All things being equal, employees with more years of experience in a company would generally make more money. Often experience at the company where you currently work generally trumps experience elsewhere. If someone were new in a position, companies would pay near the bottom of the scale. On the other hand, if a company is hiring seasoned talent - people who can hit the ground running, they will warrant a salary that exceeds the entry rate to get them to join.

Qualifications play a role
The role that qualifications and specialized training plays in determining a salary depends on the nature of the job and the relevance of the education. More formal education or advanced credentials in the specific field of work or occupational area will carry a lot of weight in starting-salary offers. An HR applicant with a degree in communications, for example, would not justify a higher starting salary because he/she would not be productive immediately versus an applicant who would not need training. If the same candidate applied for a telemarketing vacancy, the communications degree will meet the minimum requirements and therefore, she would probably earn more than an applicant with a degree in human resource management.

How wages and salaries are set

Salaries are set according to a unique blend of external market competitiveness and internal equity considerations. Every organisation has its own way of paying people and many variables, such as revenue size, number of employees, type of people they wish to attract, profitability, pre-established pay history, corporate culture, geographic location, talent depth, benefits and perks, and ease of commute, all these play an important part. Every enterprise has to compete in an open market for top talent. They all have to pay enough to attract, retain and motivate competent employees; those who pay too low fail to attract or retain performing employees and must either raise their entry salary or do without new hires. Those who pay too high will have long lines of applicants for every opening, but they need to be much more profitable or more efficient than their competition or they may spend themselves out of business, or in a down turn they could end up paying a lot of money to fund severance programmes.

Despite many companies saying that they pay according to what the market requires, no two entities pay exactly the same. Beyond the minimum starting rate, employers all vary in their practices, even for similar organisations of the same size within the same city and in the same industry. No two organisations will agree on exactly what their ‘competitive market’ is for all jobs, how it is structured or what their target pay should be. Once an employer has paid enough to hire someone, the cash paid above that amount is totally up to the company. The pay always reflects a particular employer policy on the intended role of salary within their pay mix of total compensation, of which base salary is merely one piece. However, knowing what the market is paying/doing becomes critical in planning the employment experience.

Total compensation
Therefore, total compensation is very much more than the base pay. The key elements in total compensation include:

A) Base pay
Will generally form 40% to 50% of total cash and the base pay will be structured to attract talented employees and provide a secure base of cash compensation, i.e. to provide a minimum level of pay that sustained individual performance warrants.

B) Bonus pay (Short-term incentives)
Rewards individual performance and operational results for business units and or the company. The primary compensation element to recognize performance against pre-determined business goals and reward accomplishments within a given year. Would generally be around 50% to 60% of total direct cash compensation.

C) Cash allowances

D) Long-term incentives (LTI)
Provides variable pay opportunity for long-term performance. Usually a combination of stock options and deferred bonuses.

E) Benefits (Medical, life insurance, leave, exam reimbursement, utilities, etc.)
Therefore, when companies compare their compensation programmes with market data, it is best to look at total compensation without only attempting to be competitive at a base pay level and end up paying less or more than what the market is actually paying for a particular job. In the final analysis, pay and perks is only one part of the total reward experience/package for a talented/ high-performing employee to determine whether or not to accept a job and then stay in the company. Most high performers don’t work for money alone; therefore the total offering/proposition needs to be right to attract and retain them for the long-term success of a company.

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